HOW DIGITAL LENDING PLATFORMS ARE CHANGING THE ECOSYSTEM FOR MSMEs

Digital lending is a process of lending loans that are applied for, disbursed, and managed by means of a digital platform. It allows the prospective retail and business loan seekers to avail loans digitally through a completely paperless process.

Digital advances in the financial sector: 

The infiltration of digital methods in the financial sector is a welcome development for the overall economic development. Technology has advanced greatly and made great strides in the field of retail banking in the last decade. Transactions have been facilitated by ATMs, credit cards, debit cards, etc. to be more efficient. In recent times, the wide availability of cheap internet bandwidth and smartphones has resulted in an increased digital footprint. More tech-savvy individuals in the community have also aided in the creation of a solid foundation for a phenomenal transformation in the banking sector.

Digital lending platform (DLP):

Digital Lending Platform is a technological tool that has completely transformed how loans are originated. It enables lenders to lend money through electronic (paperless) means. DLP has advantages such as reduced overhead, time savings, ease of use, and a proven, overall enhanced consumer experience. 

The first step in the digital lending process is an online application with user registration, followed by the submission of documents online, authentication, and verification of customers. Then, business loan approval, disbursement, and loan recovery are performed and processed sequentially.

Due to seamless monitoring and enhanced profitability benefits, DLP has been increasingly adopted among various banks. The automated features of digital lending platforms offer borrowers and lenders, a consistent approach to avail and deliver funding solutions. The additional benefits include allowing borrowers to easily apply for loans, offering them transparency, which, in turn, leads to customer satisfaction and significant time savings. This technology also improves the chances of business loan approval being successful, and thus reduces stress on the personnel involved.

Going Digital for Improved Customer Satisfaction

With the growing demand for Digital services in the banking sector, lending institutions, organizations and banks want to ensure that they offer everything under the sunto enhance customer satisfaction to the next level. Gone are the days when people had to stand in long queues to perform a simple banking task.  Today, a lender can verify the applicant digitally through the eKYC system. The applicant can also opt for the digital signature or E Sign provision which can be done instantly using an Aadhar card. E Nachis another revolution which helps borrowers to pay their monthly installments digitally without having to visit the branch. Once the loan is disbursed, most of the processes are automated and the borrower can focus more on growing his/her business rather than looking into loan-process related issues. In short, the entire Digital Lending process has become extremely simple, quick and hassle-free for small businesses.

FinTech

The new buzzword ‘FinTech’ is formed by blending the two words, ‘Financial’ and ‘Technology’. FinTech companies have caused a shift from the orthodox way of banking, by creating substitutes for the products offered by traditional lenders.  They provide services similar to those offered by conventional bankers but in a customized, smart way. FinTech companies have replaced the cumbersome process of obtaining loans by conventional means with digital lending. In every segment of the financial market, such as payments, investment, account creation, personal and business loans, wealth management, these FinTech companies have established their position.

Digital lending plays a vital role in the aspect of financial inclusion by providing access to credit facilities to the unbanked and underbanked sections of the population. FinTechs have widened the spread of financial services even to the most remote areas in the nation. 

Micro, Small, and Medium Enterprises (MSMEs)

The Micro, Small, and Medium Enterprises (MSMEs), corporates, and the public have transitioned to using FinTechs’ technology-driven products and have thus reaped benefits in their daily transactional needs. Digital lenders target the young population, the more digital-savvy millennials. Simultaneously, the government has also periodically developed and promoted digital infrastructure, which has pushed consumers to adapt to online banking transactions.

Regarded as a very dynamic sector, the MSMEs contribute significantly to the nation’s socio-economic development. This is because this vibrant sector helps in the industrialization of remote, rural areas, blurring regional disparities. They also have great employment generation capacity with lower operating costs.

The MSME sector is plagued with issues such as competition from MNCs (multinational companies), lack of skilled labour, low production capacity, lack of modern technologies, and lack of credit from banks. So, this sector faces several trials in procuring MSME loans from traditional banks. Banks are uncertain in approving loans to MSMEs due to lack of proper collateral, risky or new ventures, the unavailability of reliable credit history. This eventually hampers their growth and, hinders the growth of the national economy. DLPs are a boon for them in this regard and aids them in reaping their full potential. By providing them with timely credit, DLPs are a wonderful innovation in the banking sector, addressing their issues by offering less expensive, easy to access and use services, ultimately adding value to their business and growth.

Role of the Government

By nurturing existing enterprises and encouraging new ones, governments try to promote the growth and development of MSMEs. Several schemes have been launched to foster this sector. These include Revamped Scheme of Fund for Regeneration of Traditional Industries, Domestic Market Promotion Scheme, Credit Linked Capital Subsidy for Technology Upgradation, etc.,

Benefits of Digital Lending Platforms

The rapid development of the digital lending platform market could be attributed to the rise in government initiatives for digital lending, accompanied by a steady increase in digitalization initiatives among financial organizations. With the advancement of high-speed and widely available internet, India’s credit lending infrastructure has started to lean towards digitization. MSMEs are seeking alternative modes of availing business loans. Digital lending platforms overcome the various challenges in conventional lending methods, such as:

  • Long processing time
  • Collateral and documentation requirements
  • Lack of transparency not needed
  • High-interest rate
  • Inflexible loan tenure
  • Inadequate loan amount

Manual form filling is swapped with digital data capture and e-signature on DLP. This makes the loan availing process more efficient for both borrowers and lenders. The loan turnaround time is reduced to around a few hours or a day or two. In addition to these, with the availability of digitally available data, a better insight into borrowers’ creditworthiness and borrowing history is provided for the lenders. This has greatly lessened misrepresentations on the borrower’s part.

Traditional banking faces yet another major hurdle: regulation from the central bank. Banks are subject to several regulatory provisions like restrictions on interest rates, restriction on the portfolio of assets banks can hold, capital-adequacy requirements, restrictions on a new entry, reserve requirements, etc. These restrictions, aimed at avoiding bank failures, make the lending process more expensive and less flexible. However, Digital Lending platforms do not fall under the Central Bank’s strict purview. This works to their advantage by saving regulatory costs and so, they can offer cheaper and better financial services with their own terms and conditions.

In addition to all these benefits, operation efficiency has also improved as businesses save on human resources cost, owing to digital lending. Technological advancements, such as integration of Artificial Intelligence (AI) and Machine Learning (ML) by banks and FinTech firms in loan processing and rise in cloud-based platforms in the financial sector are expected to lead to major opportunities for the digital lending platform market growth.

Disruptive Potential of Fintech

With various initiatives being launched by the Government of India, like ‘Atmanirbhar Bharat’ and ‘Digital India’, entrepreneurship is being promoted vigorously in the nation. Due to this, India has witnessed the rise of countless small, yet innovative startups that need capital to grow. Digital lending platforms are expected to play an important role in nurturing this ecosystem.

It is true that with a technology-driven method for loan disbursement, FinTech organizations have paved the way for DLPs to rise as the innovative trend in load procurement. However, the recent spurt and popularity of digital lending have raised some serious concerns which may have wider systemic implications. Therefore, a balanced approach needs to be adopted so that the regulatory framework supports innovation while making sure privacy, confidentiality, data security and consumer protection are also considered. This would help upcoming entrepreneurs in MSMEs benefit from simpler and accessible credit products.

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